In the world of investing and finance, a contrarian is one who works to profit by investing in a manner that differs from conventional wisdom, particularly when the prevailing opinion appears to be incorrect. A contrarian knows that a “herd mentality” can overtake investors, leading to exploitable mispricings in markets.
For example, widespread pessimism about a company stock can drive a price so low that it overstates the company’s risks, and understates its prospects for returning to profitability. By identifying and purchasing such distressed stocks, and selling them after the company recovers, a contrarian investor can generate above-average gains. Conversely, widespread and unfounded optimism can result in unjustifiably high valuations that will eventually lead to drops, when eventually those unsubstantiated expectations do not pan out.
Sociologists have examined why groups of people move in one, united direction, even when all indications clearly show that their choices are leading them to their own personal demise.
A mentality characterized by a lack of individual decision-making or thoughtfulness, causes many people to think and act in the same way as the majority of those around them. In finance, a herd instinct would relate to instances in which individuals gravitate to the same or similar investments, based almost solely on the fact that many others are investing in those stocks. The fear of regret of missing out on a good investment is often a driving force behind herd instinct.
Also known as “herding”, such a investor mentality and tone can often cause large, unsubstantiated rallies or sell-offs, based on seemingly little fundamental evidence to justify either. Herd instinct is the primary cause of financial bubbles. For example, many look at the dotcom bubble of the late 1990’s and early 2000’s as a prime example of the ramifications of herd instinct in the development and subsequent pop of that industry’s bubble.
A Contrarian Provides Insight
Craig Brockie has been practicing contrarian investment tactics for a number of years now. I had a chance to sit down with and interview Craig on his views on what contrarian investing is and why he is an avid practitioner of this style of investing.
“The reason I’m a contrarian investor is because it’s statistically the most successful strategy I’m aware of to consistently buy low and sell high. It is also the most difficult strategy to execute, as it requires Jedi-like certainty and courage. To succeed as a contrarian, one needs to avoid being brainwashed by mainstream media, ignore their emotions and act on logic alone. Most people aren’t cut out for this. I love it.
“For contrarian investors, the results have been remarkable. 2008 was an incredible year on the short side for equities. 2009-2010 saw staggering increases with selected funds quadrupling from their bear market bottoms. Even the somewhat tamer past two years have presented some excellent opportunities and allowed contrarains to beat the market by a wide margin.” – Craig Brockie
Upcoming Movie To Help Bring Clarity To Contrarian Investing
With a runtime of 46 minutes, the film Contrarian chronicles the life of legendary investor, John Templeton, who ranks among the top five investors of all time, alongside Warren Buffett and Peter Lynch. In fact, long before Buffett and Lynch were on the radar, thousands of people were trekking to Templeton’s annual meetings – making Templeton the first real rock star investor.
Raised in a small rural town in Tennessee, John was profoundly influenced by his mother who encouraged his entrepreneurial spirit and sense of adventure from an early age. She also imbued in her son an indefatigable sense of optimism, which proved to be indispensable years later when John was in his first year of college. The Depression was in full swing and John’s father, an erratic businessman, lost everything with a risky bet on cotton futures. Undeterred, John stayed on at Yale (and later at Oxford as a Rhodes Scholar), paying his own way with the earnings from three jobs and nightly poker games. John’s resilience and his meteoric rise as an entrepreneur and investor can be attributed to lessons learned in his youth: think differently, live frugally, be willing to bet against conventional thinking, and, above all, be honest. Which made Templeton unique, particularly on Wall Street.
But John’s story does not end there. Once he made his fortune, John continued to defy convention. He continued to look at thing differently, only instead of stocks and bonds, the topics now included some of the world’s oldest questions. Why are we here? Is there evidence of God? He sought to bring together the best scientists and theologians (each which viewed the other with suspicion) to study these issues together. Perhaps John’s greatest contribution was not simply to tread new lines of scientific inquiry, but rather to create bridges between people with vehemently different opinions.